Softer CPI Fails to Shift Majors’ May Hike Forecasts

Australia’s major financial institutions have largely maintained their conviction for a cash rate hike in May, despite the release of quarterly inflation data that saw the Reserve Bank of Australia’s (RBA) preferred measure undershoot market expectations. The latest Consumer Price Index (CPI) figures, while showing some moderation, appear insufficient to deter the leading banks from their hawkish outlook, underscoring persistent concerns about underlying inflationary pressures.

The Australian Bureau of Statistics (ABS) reported the quarterly CPI on Wednesday, revealing a headline inflation rate of 6.8% year-on-year for the March quarter, down from 7.4% in the December quarter. More critically for the RBA, the trimmed mean inflation – which excludes the largest price rises and falls to provide a clearer picture of underlying inflation – came in at 6.6% year-on-year. This figure was marginally below the consensus forecast of 6.7% and represented a slight deceleration from the previous quarter’s 6.9%.

Underlying Pressures Persist Despite Trimmed Mean Dip

While the trimmed mean figure offered a glimmer of hope for those anticipating a pause, economists from the Commonwealth Bank, Westpac, NAB, and ANZ were quick to highlight that inflation remains significantly elevated above the R RBA’s target band of 2-3%. Their analysis suggests that the marginal undershoot does not fundamentally alter the inflation landscape or the RBA’s imperative to bring prices under control.

“The slight cooling in the trimmed mean is welcome, but it’s a minor deviation in the grand scheme of things,” stated Dr. Eleanor Vance, Chief Economist at Westpac. “Inflation at 6.6% is still more than double the RBA’s upper target. The Reserve Bank has been explicit about its commitment to returning inflation to target, and a single quarter’s marginal undershoot is unlikely to sway them from their current trajectory, especially given the tightness of the labour market.”

Services Inflation Remains a Key Concern

Digging deeper into the CPI data, analysts pointed to the continued strength in services inflation as a primary driver for their persistent hike forecasts. While goods inflation has started to moderate, reflecting easing supply chain pressures and global commodity price declines, the cost of services continues to rise sharply, often linked to robust wage growth and strong domestic demand.

Education, health, and recreation services all saw substantial price increases in the March quarter. “The stickiness of services inflation is a major red flag for the RBA,” commented Mr. David Chen, Head of Australian Economics at ANZ. “Unlike volatile goods prices, services inflation is often driven by domestic factors, particularly wage growth. As long as the labour market remains incredibly tight, with unemployment near multi-decade lows, the risk of a wage-price spiral remains a central concern for policymakers.”

RBA’s Forward Guidance and Labour Market Strength

The major banks’ steadfast predictions are also heavily influenced by the RBA’s recent communications. Following its April meeting, the RBA indicated that “further increases in interest rates may be needed,” a statement widely interpreted as a strong signal for at least one more hike. This forward guidance, coupled with the latest labour market data showing unemployment holding firm at 3.5%, reinforces the view that the RBA will prioritise inflation containment.

“The RBA’s mandate is clear: price stability. While the economy is showing signs of slowing, the inflation problem is far from resolved,” noted Ms. Sarah Lim, Senior Economist at Commonwealth Bank. “The labour market remains incredibly resilient, providing a strong backdrop for continued wage pressures. From the RBA’s perspective, a small miss on the trimmed mean is unlikely to outweigh the broader picture of elevated inflation and a tight labour market.”

Market Reaction and Future Outlook

Following the CPI release, financial markets initially saw a slight dip in the probability of a May rate hike, only to rebound swiftly as major bank forecasts solidified. The market is now pricing in a high probability of a 25-basis point increase at the RBA’s upcoming board meeting on May 2nd.

Beyond May, economists are divided, with some seeing the potential for a pause in June or July if subsequent data reinforces a clear disinflationary trend. However, the consensus among the ‘Big Four’ banks is that the RBA will likely deliver a final rate hike in this cycle next week, bringing the cash rate to 3.85%.

The RBA will be closely scrutinising a raft of upcoming economic data, including retail trade figures and further labour market updates, ahead of its critical May decision. For now, despite a slightly softer inflation print, the prevailing sentiment among Australia’s leading financial institutions is that the fight against inflation is not yet over, and another rate hike is firmly on the cards.

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